For any corporate, when it comes to fund raising, Private Placements are one of the most favored modes used by companies. The main reason behind this favouratism is the ease available to companies and their managements, in terms of less legal hassles, choice available for selecting the allottees or amounts to be raised etc. The Companies Act, 1956 and SEBI guidelines and regulations presently govern conditions for private placement, depending upon the nature of the company.

However, in the existing legal regime, there existed certain grey areas, which have time and again been misused by companies and their promoters to indulge in malpractices, thereby compromising the interest of innocent stakeholders.

Before we go any further to discuss the provisions relating to Private Placements, it is necessary to understand the meaning and connotation of the said term. Until the Companies Act 2013, the term ‘Private Placement’ was not defined under any law though the Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”) do define the term “Preferential Allotment” as any allotment to one or more shareholder(s) or person(s) instead of all the existing shareholders.

For the 1st time in Indian legal history, the term “Private Placement” has been defined under the Companies Act 2013. Section 42. of the Act defines “Private Placement” to mean any offer of securities or invitation to subscribe securities to a select group of persons by a company other than by way of public offer through issue of private placement offer letter.

In most simple words, private placement refers to an issue/ allotment of securities to a select group of people, other than the existing shareholders of the company. Meaning thereby, any issue/ allotment other than a Public Issue or a Rights Issue shall be a private placement.  (Section 42)

But along with defining private placement, the Act also defines the term i.e. Preferential offer. ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities( Section 62 read with rule no 13 of The Companies (Share Capital and Debentures) Rules, 2014). Though both the terms seems to offer same meaning but the latter only covers equity shares and other convertible instruments.

Companies Act 2013 promises better protection of stakeholders by tightening the provisions relating to private placement and creating transparency in the process.

Under the Companies Act 2013, read with rules, detailed provisions have been promulgated governing the private placement of Securities by the Corporates.

Some of the key provisions, governing Private Placements have been given hereunder:

• An offer of securities or invitation to subscribe securities shall be made through a private placement offer letter in Form PAS-4  to a selected group of persons by a company (other than by way of public offer) only if the proposed offer has been approved by the shareholders of the Company, by way of a Special Resolution. It is important to take note that now all types of securities are covered under the ambit of Private Placement.
• The Explanatory Statement to the General Meeting Notice should contain the basis or the justification for the proposed issue price.
• This Offer Document is needed to be serially numbered and addressed specifically to he concerned person. It can sent either in writing or in electric mode, within a time period of 30 days.
• In case the company makes an offer or invitation for non-convertible debentures, the Company may pass a previous special resolution is required to be passed only once in a year for all the offers or invitations for such debentures during the year.

• The offer or invitation shall be made to such number of persons not exceeding 200 persons in aggregate in a financial year individually for each kind of security (equity share, preference share or debenture). For the calculation of the limit of 200, any offer to Qualified Institutional Buyers or to the employees under a scheme of employee stock option, shall not be considered.  
• Further, it has also been mandated that the value of such offer or invitation shall not be with an investment size of less than Rs. 20,000/- of the face value of the securities, per person.

• The above mentioned limit of 200 allottees and Rs 20,000/- face value of investment shall not be applicable to:
  • NBFC Companies; and
  • Housing finance companies;
    
    

    Provided they comply with the Regulations made in respect of offers on private placement basis, by RBI or National Housing Board. However, if RBI or NHB have not specified any similar regulations, even such companies would be required to comply with the provisions of these Rules.

• No fresh offer or invitation of any securities shall be made unless allotments in respect of all earlier offers of any other security are completed.

• The subscription money may be paid through cheque or demand draft or other banking channel but not by cash, that too only from the proposed allottee’s bank account. In case of joint holders, the payment is needed to be received from the 1st holders’ bank account.  

• The allotment of securities should be completed within 60 days of the receiving application money for private placement. If the company is not able to complete allotment within 60 days, then it shall refund the money within 15 days of the expiry of such 60 days.

• The application money shall be kept in separate bank account and shall not be utilized for any purpose other than for adjustment against allotment of securities or for repayment of money where the company is unable to allot securities.

• Complete record of private placement offers and acceptances shall be maintained by the company in Form PAS 5.

• This record, along with the PAS 4 form is needed  filed with the Registrar of Companies and in case of listed entities, with SEBI, as well, within a period of 30 days of circulation of relevant private placement offer letter (i.e. the date of the private placement offer letter).

• No company shall release any advertisement or utilize any media, marketing or distribution channels or agents to inform the public at large about the offer.

• A return of allotment shall be filed with the Registrar in Form PAS 3 by the company making allotment of securities including complete list of all the security holders mentioning their full details, including name, address, mail id, date of allotment etc. within 30 days of allotment.
• Allotment of shares under Preferential Offer shall made in compliance with the provisions of the Private Placement